Royal Caribbean Cruises Q1 2009 Earnings Call Transcript

| About: Royal Caribbean (RCL)

Royal Caribbean Cruises Ltd. (NYSE:RCL)

Q1 2009 Earnings Call

April 23, 2009 10:00 AM ET


Brian Rice - Executive Vice President and Chief Financial Officer

Richard D. Fain - Chairman and Chief Executive Officer

Adam M. Goldstein - President and Chief Executive Officer

Dan Hanrahan - President and Chief Executive Officer of Celebrity and Azamara Cruises


Steven Wieczynski - Stifel Nicolaus

Timothy Conder - Wachovia Wells Fargo

Felicia Hendrix - Barclays Capital

Scott Barry - Credit Suisse

Robin Farley - UBS

Steven Kent - Goldman Sachs

Sharon Zackfia - William Blair


Good morning. My name is Adrian and I will be your conference operator today. At first time, I would like to welcome to the Royal Caribbean Cruises Limited First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Brian Rice, you may begin your conference.

Brian Rice

Thank you Adrian, and good morning everyone. I would like to thank you for joining us this morning for our first quarter earnings call.

With me here today are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President and CEO of Royal Caribbean International; Dan Hanrahan, President and CEO of Celebrity and Azamara Cruises; and Ian Bailey, our Vice President of Investor Relations.

We have posted a number of slides on our investor website which we will be referring to during this call.

Before we get into our results and talk about the current operating environment, I would like to remind you of our notice about forward-looking statements which you will see on the first slide.

During this call, we will be making comments which are forward-looking statements. Forward-looking statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures.

Additionally, we will be discussing certain financial measures which are non-GAAP as defined by Regulation G. And a reconciliation of these items can be found on our website.

Richard will begin the call with a strategic overview of our business. I will follow with a brief recap of the first quarter, update our guidance, and provide some insights into the recent demand environment in our financing activities.

Adam and Dan will then talk more about their brand and how we are managing the business in the current environment. Then we'll be happy to open the call to your questions. Richard?

Richard D. Fain

Thanks Brian and good morning everyone. I must admit that I find myself a little bit conflicted about the earnings that we are sharing with you today. Its tough to be pleased about a quarter, that's resulted in one of the few losses we have posted in a long time, and in fact we'll never be happy with a loss situation nor am I happy with the profitability we are looking at for the full year.

On the other hand, this past quarter provided us some very significant wins for us. The most remarkable news about the quarter and about our outlook is that we have very little new to report. Overall, the year's developing pretty much in line with what we said three months ago. Some positive, some negatives but bottom-line basically the same.

Most importantly, our revenues continue to track above where we expected them to be. Stronger close-in bookings helped us to deliver outstanding cost control. Forward bookings showed some downside buyers but overall remarkably in line with what we had predicted.

We did not previously assume that the economy would get any better and we're still lumpy seeing our projections on any economic improvement. But some months ago the market had begun to stabilize and we are happy that the level of stability has continued to increase.

Even in normal times, I'm always impressed with our revenue management team's ability to predict revenue within such narrow parameters. I'm still amazed in how accurate they've been in the past and how accurate their predictions over the last several months have been.

Admittedly, we're providing our guest more value than we would like to these days. And pricing continues to be miserable, but at least it seems to be at a miserable level that's relatively stable.

I am pleased that it does not appear necessary to reduce the guidance range of our expected yield deterioration. And I'm also pleased that volume is remaining surprisingly robust given the current economic climate. Overall, while this is certainly not an enjoyable business environment, I'd say it's at least manageable.

As I mentioned in prior calls, our focus on liquidity has dramatically increased and looking out on long-term forecasts are better today than they were previously. How many companies that you follow can make such a statement?

Now that we've completed Oasis, some people may question our ability to finance more at the end of 2010. And I do admit that it's hard to show it on an excel spreadsheet or an SEC filing. But I think our success with the financing of Oasis of the Seas demonstrates the power of the factors we have previously discussed to help us accomplish such things.

We have 30 or 40 years relationship with the shipyard, the people of Finland and with our banks. These things actually do matter even in today's world. I'd also like to take this opportunity to congratulate our management team on their excellent work in controlling our costs or continuing to provide an excellent product.

You can see the results of their efforts and it is very impressive. What you can't see is the fact that our passenger ratings are also at their highest level in years. We believe it is possible to control cost while maintaining strong branding momentum and you can see that philosophy is working. Part of it is of course is due to a natural offset.

The weaker economy hurts our revenues, but it also presents opportunities for improving our costs and we are doing everything we can to take full advantage of those.

In addition, as I've noted in prior earnings call, the growth of international operations means that foreign exchange has become a more relevant driver of our performance. Again, this provides a natural hedge because the stronger dollar hurts our revenues just as it helps our expenses.

Overall, we're still deeply disappointed to be talking about a smaller loss for the quarter rather than a bigger profit and we're disappointed that the whole year profit looks to be only half of what it was last year. But in this economy, I think that actually shows just how strong and how resilient our industry and our company are. Imagine how we will look, once things start to improve.

A further comment on deployment and itineraries; one of the on the cruise line business model is that our assets float and that they can be shifted as markets and circumstances change. A year or two ago, everyone was talking about the great strength of Alaska and worried about the possible weakness in the Caribbean. Now the situation has reversed itself.

Now we don't change course in a dot (ph), but we are able to move ships around in relatively short period of time to go where they are wanted, and ships do go where they are wanted.

Turning to our international expansion; that continues to develop successfully. It does require a major commitment of resources, but the potential benefits are also major and we intend to pursue them aggressively.

There've been a lot of questions about Alaska. Sometime ago we announced, very quietly that we're reducing our capacity in Alaska initially by one ship. Alaska continues to be an important market for us and one that we wish we're going in the other direction. Regrettably, the referendum has led to many of the unfortunate consequences that we have feared for us and for Alaska.

I think a lot of people were misled about what it would do, and I wish we had done a better job of explaining the inevitable implications. Now this has been and it will continue to be an awful full year, and (inaudible) horribleous (ph) to use the Queen's words.

Pricing is still terrible and the economy dreadful. But we continue to see powerful evidence demonstrating yet again how resilient our business is. We are determined to continue improving our profitability even in this environment and preparing ourselves to rejoice as the markets recover.

With that, I'll turn it over Brian for more a detailed discussion of the quarter's results. Brian?

Brian Rice

Thank you Richard. I would like to briefly go through the first quarter results which we summarized on the second slide. In the first quarter, we had a net loss of $0.17 per share versus our guidance of loss between 30 and $0.35.

Our revenue yields for the quarter were down 13.5%, which was better than our guidance down 14 to 16%. Ticket in tour revenue came in slightly better than we had forecasted and onboard spending was consistent with our forecast.

As you know, there have been significant swings in foreign exchange rates over the last year. In addition to the success of our global expansion efforts, that means almost one-third of our revenues and a quarter of our costs are denominated in currencies other than the U.S. dollar. Because of this, we thought it would be helpful to give you some insight into how exchange rates impact our results.

In the first quarter, the stronger dollar negatively impacted our yields by about 4 percentage points. So if we were to report on a constant dollar basis, our yields would have been down around 9.5%. You may also recall that during the quarter we refunded approximately $30 million in fuel settlement that cost us about 2.5 percentage points in yield. So while the revenue environment has been very challenging, I think our results were more resilient in this very bad economic mix cycle than many have thought possible.

On the cost side, net cruise costs excluding fuel per available passenger cruise day came in 6.8% below last year and it's the better end of our previous guidance. And while the stronger dollar per revenues in the first quarter, we are fortunate to have a natural offset and saw benefits on the cost side.

On a constant dollar basis, our costs would have been down about 4.5% compared to last year. Our fuel expense was $155 million for the quarter, which was 10 million better than the anticipated at the time of our last call. And assumption was about 2% better than forecast and pricing was slightly favorable.

Overall (ph) net cruise costs for APCD improved by 7% versus the same time last year, and were better than -- our previous guidance is down between 4 and 6%.

Within other income and expense, we had an out-of-period charge of $7.1 million. During the quarter, we'd learned that a software program we licensed for purposes of evaluating the fair value of our interest rates swaps contained an error related to the LIBOR curve. And the $7.1 billion represents the accumulative reduction in the fair value of certain swaps related to 2007 and 2008.

Despite this charge, the combination of better revenue performance and lower costs enabled us to come in about $0.15 better than the midpoint of our guidance.

Now I would like to provide you with an update on the booking environment. Over the last three months, we have seen a fairly consistent demand environment. The booking window is certainly more contracted that we had seen in 2007 and 2008 and much of the demand is being driven present by aggressive pricing.

The good news so is the consumers becoming more predictable and our discounting is level off over the last few moths you may recall on our fourth quarter earnings quarter we showed you a graph of the first question trends months which demonstrated how we move closer to the day to departure booking significantly improved mostly without any additional pricing erosion.

On slide three, we have updated the same chart to show you how the first quarter continued to evolved from the time of our last call. The green line shows the change in the volume of new business versus the same time for the prior year by the week in which the booking was made. The blue line shows the year-over-year pricing changes for new business.

Since our last call, the volume of new guest booking continued to be much greater than at the same time last year. The pricing levels as compared to a year ago remained relatively consistent.

If you turn to slide four, you will see the second quarter departures are behaving much the same way that the sailings that occurred in the first quarter debt. Bookings lagged behind a year ago levels until we reached the end of January. Since then the volume of new business has improved significantly and year-over-year pricing changes have been very stable. We are very fortunate to have good systems that enable us to map consumer behaviors and adapt our revenue management style to the changes in booking patterns.

Clearly, we would all sleep better at night with an expanded booking curve and less uncertainty but we grow more confident each day that our models have better calibrated to the new consumer buying patterns.

On slide five, we have graphed the same booking information for third quarter departures. By today's standards, we are still fairly early in the booking cycle and we are now entering a very important period for new bookings. But again, the same pattern that we witnessed in the first and second quarter seems to be developing in the third quarter and the momentum of new business for third quarter sailings has begun to accelerate.

Our revenue management team watches this type of information at a very final level of detail. It is constantly adjusting to capture the most revenue out of the available demand. In updating our guidance, we have again assumed that not much changes in terms of consumer behaviors in the overall economy.

On slide six, we have provided our updated guidance for the second quarter and full year. Historically, we have given a broader range of both yield and earnings per share projections. But given the nature of the environment and the wide ranging views in the market today, we have tried to be as transparent as possible and provide you with our best estimates.

There is obviously more uncertainty today than usual, but the predictability of our booking is better everyday and we believe that risk of a dramatic deviation continues to fall.

For the year, we expect yields will be towards the lower end of previous guidance or down between 12 and 13% and on an as reported basis and down 9 to 10% on a constant dollar basis.

We expect yields to be down around 17% in the second quarter on an as reported basis and around 12% on a constant dollar basis.

In the third quarter, our comparables for Pullmantur become much easier as the Spanish economy was one of the first to feel the impact of the global recession.

Nonetheless, we expect challenging yields in the third quarter as our product mix is simply weighted towards seasonal premium itineraries such as Alaska which were struggling the most. At this time, our best estimates have third quarter yield change on both in as reported basis and on a constant dollar basis to be slightly better than the second quarter.

As we mentioned in our press release, both the second and third quarters are impacted by about 5 percentage points at current dollar exchange rates. As you may recall, the dollar became much stronger during the fall of last year as the global economy began to deteriorate.

Accordingly, at today's level, the impact of foreign exchange is projected to be substantially less in this year's fourth quarter.

To help illustrate this, on slide seven, we have graphed the current spot rate for the British pound and the Euro as compared to the average exchange rates we experienced last year in the second, third and fourth quarters.

In the second quarter of last year, the average rate for the British pound was about $1.98. Today Sterling's spot rate is better $1.45 or 25% less. As you can see, the value of these currencies was substantially higher in the second and third quarters of last year.

When we get to the fourth quarter though, the comparable rates of exchange are much closer to today's spot rates. Another benefit, if you will, of this year's fourth quarter is the impact we had already absorbed from the economic downturn last year.

Unfortunately, the sudden and dramatic nature of the recession had a substantial impact on last year's fourth quarter. But as a consequence, our benchmark this year will be lower.

Lastly, we are seeing a very favorable in the fourth quarter from the introduction of the Oasis of the Seas. I do not want to steal Adam's thunder, so we'll wait for him to elaborate.

Going back to the previous slide, we have further improved our guidance on the cost side and now expect net cruise costs excluding fuel to be down 6 to 8% for the year and down approximately 9% for the second quarter.

Including fuel, net cruise costs are forecasted to be down 10 to 12% for the year and between 11 and 12% for the quarter. And while the stronger dollar has hurt our revenue projections, it is helped our cost guidance.

In the second quarter, we are receiving about a 5 percentage point benefit and for the year, a little less than three percentage points.

We have included $574 million of fuel expense for the year and $142 million for the second quarter in our guidance based on current pricing. We are 51% hedged for the second quarter and 48% for the full year.

And while we have not entered into any additional contracts since our last call for 2009, we have been more aggressive hedging fuel further out. We are now hedged approximately 40% for our 2010 forecasted consumption and about the 25% for 2011.

Our business model works quite well at the current pricing and we felt it was prudent to take advantage of this opportunity.

And lastly for guidance, we are projecting the second quarter earnings per share to be roughly breakeven to slightly down and the full year to be approximately $1.35.

Now I would like to update you on our financing activities and liquidity. During the first quarter, our treasury team was quite busy. As you know, last weak we announced that we had obtained just over $1 billion in unsecured financing commitments for Oasis of the Seas which is scheduled for delivery in the fourth quarter.

The Finnish have always been great to work with and really help make this financing quite smooth. In addition, we were fortunate to work with three of our banks with which we have great relationships and the club nature of the deal enabled us to get this done quickly and on good terms.

We also entered into two credit agreements for unsecured term loan for up to 80% of the contract price of Celebrity Equinox which is scheduled for delivery in the third quarter and Celebrity's fourth Solstice special which is scheduled for delivery in 2011. Both have 12 year terms in semi annual amortization.

Celebrity Equinox will bear interest at a floating rate of LIBOR plus 50 basis points which was locked into back in 2005. Solstice four will bear an interest at a fixed rate of 5.82% based on terms originally agreed to in 2007.

I'm sure the next question many of you will ask is what about lower the fees in next year's debt maturity. The lower is still about a year and a half away from delivery, but we have already started early discussions. I'm not going to go into any specifics, but as we said with Oasis, we are comfortable we will get the necessary financing.

As far our scheduled debt maturities go, we remain confident that current liquidity coupled with forecasted operating cash flows would be sufficient. That said, we are always looking for ways to further improve liquidity.

We pride ourselves on having very solid relationships with our lenders, finding ways to support each other. For example, since we filed our 10-K, we have moved out some of our maturities and agreed to prepay a $100 million 2010 maturity in 2009 while extending another $100 million payment due in 2010 out until 2011. The net effect of this improved 2010 liquidity by $100 million.

I could speak for a while about the contingencies we have and the actions we evaluate on a daily basis to improve our liquidity position. But I do not think it is prudent to publicly speculate on possible next steps given our current sound position and the very dynamic nature of the market today.

I do think we have demonstrated our resolve in this area and we've also shown sensitivity to the interest of our lenders and shareholders.

Our liquidity at the end of the quarter was approximately $1.1 billion including over $450 million in cash and $625 million available on our revolving credit facility. The primary driver of the improvement in liquidity from year end was the sales of the Celebrity Galaxy to our 50% owned German joint venture TUI Cruises.

Now I will turn the call over to Adam for his comment about the Royal Caribbean International brand.

Adam M. Goldstein

Thank you, Brian. Good morning everyone. As you have heard, market conditions continued to be very challenging in the first quarter and the sacrifice of rate to achieve traditionally high occupancies was very evident.

Even in difficult times, we believe Royal Caribbean International is achieving a premium versus our primary competitors. However, pricing is materially down in comparison to any period prior to the fourth quarter of 2008.

Although the pricing weakness affected all products, it was most prominent in a number of our developmental programs where there are not matured cruise markets that will respond in volumes of pricing stimulus, as is the case in North America, even in recession. This included our products in Asia, Australia, Brazil and Panama.

In a number of source markets, for example Brazil and Mexico, currency devaluation exacerbated the shock of the recession. So, on the whole our Caribbean programs were the most successful during the quarter albeit at reduced yield.

Looking forward, the evolution of our full year guidance for the lower end of the range we've previously established has been covered by Brian and Richard. They each noted the increased stability of our ticket revenue generation. I would like to add some color on the influence of some of our major product groupings on the development of our guidance from three months ago till now.

Our Caribbean products have favorably influenced our new full year guidance. Of course, the Caribbean this summer will not be immune to the pricing pressures we are seeing everywhere. But relative to our other products, it continues to be the most robust. Our two freedom class ships in the Caribbean continue to generate substantial premiums to the competition and to the rest of our fleet.

I should note that short cruises in the Caribbean always offer the least visibility and are especially hard to predict in 2009 given the late booking nature of the current marketplace. Our European products have had a neutral to slightly favorable influence on the evolution of our full year guidance.

Given there was a recession, a stronger dollar and growing capacity, our European yields will be weak in 2009 on a year-over-year basis. Fortunately, however, our strategic expansion in Europe is delivering benefits to our brand as the number of Americans cruising in Europe has decreased. We estimate at about three-fourths of our guests in Europe this season will originate from European source markets.

Alaska, as has been lightly reported, is suffering disproportionately on a yield basis and has had a negative influence on the development of our full year guidance over the last three months. Given we have had no growth in our Alaska capacity for several years, we did not expect the price declines we are experiencing even in the recession. The deficit extends to our Alaska tour business where 2009 will not match 2008 which was our best year ever.

Our exotic and developmental products have also had an unfavorable influence on our guidance. Most of this impact is already been experienced in the first part of the year. We are taking a conservative view of the early part of the upcoming winter season even limit its visibility in several emerging markets where bookings are typically late and where the markets are experiencing recessionary conditions.

Moving on to the ship we do not have yet, Oasis of the Seas. There continues to be great publicity for the ship as a whole and for several of the most notable features which are understood now as neighborhood. Despite the success of our communications efforts, we are simply unable to describe how phenomenal this ship will be. We are very pleased that this shipyard is sufficiently confident in the construction process.

We have advanced the delivery date by a week until late October. This will allow our team an extra week to prepare for the first revenue filling which is December 1st.

While we are still over seven months out from that sailing and visibility remains limited, the level of bookings and the prices for Oasis first 10 months is very exciting. In fact, the price Oasis is commanding in the context of our historical experience in the Caribbean seven night market is really quite remarkable.

As I stated last quarter, on board revenue is meaningfully down but to the same degree the ticket yields are down. This weakness is across the major onboard revenue components and is exacerbated by the reduced number of Americans and European cruises, as their purchases of shore excursion is normally an important driver of summer onboard revenue.

Finally, we continue to focus on cost control. And I would like to express my appreciation to our leadership team for their efforts in this regard. Very fortunately, despite the cost reductions we have made, our product is generating a entire satisfaction ratings for the last few years and continuous to be very deserving of the premiums that commence. Dan?

Dan Hanrahan

Thank you Adam, and good morning everyone. As you have heard from Brian and Adam, we are working through particularly challenging times. While both ticket and onboard revenues for Celebrity exceeded our first quarter expectations, they are still well below 2008 levels and represent an extraordinary value to the consumer.

We are seeing very similar results in Europe and Alaska which Adam mentioned, so I will not go through the market-by-market detail. While the revenue decline is frustrating, there were some bright spots. Solstice just finished off her debut season in the Seven Night Caribbean market and even in these challenging times, at favorable yields versus 2008.

These positive results were not only versus our other ships and similar markets during the same time period, but versus Q1 2008 as a whole.

In Europe, Solstice and Equinox are also holding up relatively well and are continuing to command a healthy premium to our other hardware. By any measures, Solstice has been a terrific addition to Celebrity. The response from gas travel agents and the media continues to be beyond what we had expected and gives us confidence as we are preparing for delivery of Equinox and Eclipse.

We will launch Eclipse in the spring of 2010 which is a third of the Solstice class ship. Eclipse will be dedicated to the U.K. market. We recently opened Eclipse for sale for the 2010 year of pan season. Although still early, indications are quite encouraging as the ship is booking ahead of expectations. And over 85% of those bookings are U.K. guests.

We're quite pleased by the response of the U.K. market to Eclipse. This gives us confidence that our plan to continue to expand Celebrity stores in outside of the U.S. is on the right track.

I also mentioned onboard revenue. Our onboard revenue challenges continue to be driven primarily by gaming and other auctions. Our areas of strength are phone, Internet, shore excursions and Solstice.

We've seen similar success for onboard revenue for Solstice that we have seen on ticket revenue. While there has been onboard revenue pressure on the celebrity fleet, Solstice has helped to offset the challenges and as the result we were able to exceed our Q1 expectation.

We continue our diligent focus on costs while maintaining and improving the experience for our guests. This is an area that received constant attention from the Celebrity leadership team. Brian?

Brian Rice

Thank you Dan. Adrian, we'd now like to open the call to questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Assia Georgieva of Infinity Research.

Assia Georgieva – Infinity Research

Hi, good morning. This is Ashley. A couple of questions. Dan, on your comment on onboard spend for shore excursions and net auctions (ph) are the biggest challenges. Can you discuss spa and other trends and how you expect that to shape up during the summer season when you have a lot more European passengers? And I'll ask my second question afterwards.

Dan Hanrahan

Yeah, Ashley what I actually said was that our onboard challenges were driven primarily by gaming and net auctions and where we've seen strength has been phone, Internet and shore excursions in Q1.

It will be interesting to see what we see in shore excursions in Europe. Last year when we started to see some softening in the European market for Celebrity and ticket we saw short excursions hold up pretty well. We think part of what's going on here is our guests they've just been very cautious about the way they are spending there on their onboard money and they want to make most of their vacation experience and a shore excursion is also a way to do -- always a way to do that.

We also sell shore excursions I guess book shore excursions ahead of time. We've seen that continue to be good. The area that you mentioned spa continues to be above as it has been over the last couple of quarters for us. We will see some softness there. But where we are seeing the most has been in gaming and net auctions.

Assia Georgieva – Infinity Research

Okay, okay. Thank you. And a question, quick question for Brian. Could you give us some detail on the Oasis financing in terms of whether you are leaning towards the fixed rates and what you expect the range to be. For example, Solstice was at almost 5.8%, a little bit higher than the other financings. Where do you expect Oasis to end up in terms of interest?

Brian Rice

I see first I think 5.8% in today's market is quite exciting to have a 12 year fixed term 5.82%. I think we are extremely pleased with that financing. We are still working through some things on Oasis, as we said when we issued the press release. We have an option at fixed floor floating. We're actually considering perhaps taking a portion of the debt in euro and there is two separate trenches; there is the SEC trenches and there is the bank trench and we are working through that.

I will tell you that we're still a couple of weeks away probably from finalizing it but our best estimate at this point in time where we'll probably end up given today's pricing, is probably somewhere in the range around 7%.

Assia Georgieva – Infinity Research

Okay. Around 7. Okay. That's quite helpful.

Brian Rice

And that would be the -- that's a mix of some fixed and some floating. That's our best guess right now.

Assia Georgieva – Infinity Research

And you expect to have a mix of floating inside?

Brian Rice

Yes. We're trying to manage a portfolio here. We tend to keep between 40 and 60% of our interest rates at fixed and we're kind of looking forward as to what we'll be electing in another financing as well. But right now it looks like it will be a mixture of fixed and floating and it will probably come out right around 7% given today's rates.

Assia Georgieva – Infinity Research

Okay. Thank you Brian. And my last question is more about Alaska. When we I guess try to reduce the impact of the $50 head tax, is it by extending the links of the voyage is I'm sure you are aware home, the amount of cushions is just trying to offering two week Alaska is still that we need to as and when it comes. Are you considering going towards a step right back maybe a 10 day voyage or even a 14 day voyage in 2010? Do you still have flexibility in that?

Adam Goldstein

Hi, it's Adam. We've announced our sailings for 2010 and we're going to continue on our seven-night patterns with the two ships the Royal Caribbean will have there and the three ships that Celebrity will have there. And this is because our market, our demographics, our psychographics respond to that length of cruise in Alaska and we're not going to deviate from what is the sweet spot for our market even in difficult times.

Assia Georgieva – Infinity Research

Okay. Any thoughts on deployment 2011 and beyond given how much weakness we have seen, including for the tour division (inaudible)?

Adam Goldstein

Well, we understand the deployment choices are critical for our business, not only for Alaska but for our entire portfolio but its very, very early in this strategic deployment considerations for 2011 from April of 2011 onwards. We will be announcing those decisions in early 2010. So the next six months are really the strategic window of opportunity to consider our choices and go from there.

Assia Georgieva – Infinity Research

Thanks. At the end one thing, Adam maybe you can help me with this, on Europe, have you seen any deterioration in pricing since wave season ended more specifically the last four weeks or so?

Adam Goldstein

Our pricing has been fairly consistent. In fact part of our overall message here is that we've been able to have fairly consistent stable pricing over the last three months since our previous guidance and Europe is encompassed by that.

Assia Georgieva – Infinity Research

Thank you so much and good job on your cost cutting efforts. Keep that up.

Adam Goldstein

Thank you.


Your next question comes from the line of Steve Wieczynski of Stifel Nic.

Steven Wieczynski - Stifel Nicolaus

Yeah good morning guys. First, I don't know if I just don't see it, Brian maybe you can help out here. What are the average fuel cost per metric ton for the quarter?

Brian Rice

Actually Steve you've got something that I don't have in front of me. I apologize. We frankly didn't focus that much on fuel. I can tell you our rates were down slightly for the quarter and our consumption was down 2%. But if you could follow-up with on and after the call, we can certainly get that data for you.

Steven Wieczynski - Stifel Nicolaus

Okay. Will do. And then I'm not sure if you'll be able to answer this or you -- I doubt you will. But what's the average price in terms of, if you looked at crude right now of where you're kind of locked in for a little bit further I'd say 2011 at this point?

Brian Rice

Well I can tell you that we're certainly underwater in '09 on our hedges, but that's included in the $574 calculation we gave you. We have been hedging recently. If you were to compare our pricing out into 2011 against the forward curve right now, we'd be very close to where the forward curve is for 2011.

Steven Wieczynski - Stifel Nicolaus

Okay. And then last question for either Dan or Adam. Two markets or I guess a couple of markets where we're trying to focus on here is what have you seen in terms of the close to home ports recently in terms of bookings and what you've seen on the Spanish market?

Dan Hanrahan

I can take the close to home ports. We saw some strength in the first quarter in the Caribbean on both our brands and that was helpful to be close to home. So, we were now at a point where most of our ships are leaving and for Celebrity anyway and are headed out to Europe and Alaska. I know that Royal Caribbean will still have some ships here in the Caribbean and Adam had commented on in his remarks that that was helping the overall yield. And I think I'll let Richard comment on the Spanish market.

Richard Fain

Yeah hi, Steve. The Spanish market is probably one of the hardest hit of the many economies with which we deal. And the Spanish economy started down the recessionary path a lot earlier than everyone else that has continued there. They've just reported for the first time actual deflationary results. It was down two-tens of a percent which is pretty close zero, but those kinds of things are worrying. So there is no question that Spain is feeling the effects more than others. On the other hand because it started earlier on a comparable basis and will begin to look better before too long.

Steven Wieczynski - Stifel Nicolaus

Okay. Great. Thanks guys.


Your next question comes from the line of Tim Conder of Wells Fargo.

Timothy Conder - Wachovia Wells Fargo

Thank you gentlemen. A few questions here. Can you talk little bit more on the ForEx gentlemen and balance your specific pound and euro exposure? Whether on revenues or cost or just if not specific numbers just maybe directionally there? And then relating to some of the comments regarding some of your startup brands, how do you look at those as far as timetable of investment and from a free cash basis. At what point do you do a revaluation either positively or negatively with those brands?

Dan Hanrahan

Hey Tim. I'll take the first part on FX and let I'll Richard talk about the new brands. On FX, we are long in Sterling. We are I would describe it as slightly long on Euro and we're also long on Canadian dollars. As I mentioned about a third of our revenues are now coming in among those three currencies primarily. We do have some other currencies. I think the fourth largest would be probably the Norwegian Krone.

And about a quarter of our expenses are now coming in. And the expenses we have the billion fleets that's denominated in Sterling on them. We obviously have advertising expenses and what not. But in Sterling, most of our port expenses certainly Pullmantur would all be denominated in euro.

Timothy Conder - Wachovia Wells Fargo


Richard Fain

And Tim with respect to startup brands, I'm not sure that there is a particular point in time at which one says you have this long three months, 12 months, whatever the period is. We look at each one individually. If you look at the strategic intentions of it and you look at whether it's moving in the right direction or not. In any event, none of them are particularly material to the overall company

Timothy Conder - Wachovia Wells Fargo

Okay. And then one question on guidance gentlemen in particular interest expense. Brian, can you kind of help us there? Your prior guidance for the year was 320 to 340 and you brought that range down to roughly 25 to 40 million on the high and low, a little bit of color there. And then, overall for the whole company globally, what percent of your capacity is booked at this point?

Brian Rice

Tim on the interest expense, I think the primary benefit we've received here has been the falling interest rate, the falling LIBOR rates that have been out there. As I alluded to before we have plus or minus 10% at any point in time half of our debt is at a floating interest rate and we've benefited from that. I think we also may have some slight wins on the overall cost of some of the new financing that we had done relative to what we had baked in to the guidance.

In terms of percentages, we're probably, I would guess just under three quarters all land booked for the year.

Timothy Conder - Wachovia Wells Fargo

Okay. Great. Thank you gentlemen.


Your next question comes from the line operating Felicia Hendrix of Barclays Capital.

Felicia Hendrix - Barclays Capital

Hi, good morning guys. Just kind of tagging onto the last question would be just under three quarters are in booked for the year. How does that compare to last year on your normal year?

Unidentified Analyst

Sure Felecia, we certainly are as we look out into Q3 and Q4 as you would extrapolate from the graphs that we showed, we are behind by '07, '08 standards. We would be ahead of where we were. You recall when we had our fourth quarter call, we talked more about the booked loads rather than the trends. Frankly given this environment, I don't think '07, '08 is quite as comparable.

We're booked ahead of where we were back in '02, '03. I think what we're seeing in our modeling is that we're behaving more like we were probably back in '04 levels. And what we've tried to do is really calibrate our revenue management modeling around, what we're seeing in consumer behaviors. We try to give a low transparency into how we did in Q1, what we're seeing in Q2 and its still early but the pattern certainly seems to be developing in Q4. Frankly -- I'm sorry in Q3. Frankly Q4 would look very similar to those graphs, but we're just earlier on the booking cycle.

Felicia Hendrix - Barclays Capital

Okay, thanks. And then along those minds, kind of a different take on this. Where are you seeing those booking to have now in terms of how far out people are booking. I'm assuming that's getting a little bit longer often?

Brian Rice

Well, we actually, we looked through a lot of different sides and what to try to share this morning and we've seen certainly, if you compare the last year we have a significant greater portion booking within three months. I think if there is something encouraging in terms of where the booking curve could be going, we have seen a little bit of uptick lately in the three to six months window.

Not a whole lot but there has been a little bit of movement there, and it's getting closer to equilibrium for the last couple of years. When you go beyond that six months market it's where we're seeing people really holding back in the high degree of uncertainty.

Felicia Hendrix - Barclays Capital

Okay. Dan and just switching and you had said in your prepared remarks the discounting has ramped down over the past few months and Adam also had said that. Are we still seeing a lot of efforts out there from all brands Oasis and others. Particularly which are allowing consumers to only put half of the deposits down to book?

So obviously we're still -- it's since is out there for people who book cruise in the resource price and these types of incentives. I'm wondering if you guys are still continuing that and also can you help us understand when the centers withstanding (ph) have been offered on the Oasis?

Dan Hanrahan

Hi Felicia.

Felicia Hendrix - Barclays Capital


Dan Hanrahan

We had our ASAP program in place for the bulk of the first quarter which offered some of the elements that you were just alluding to. Many of those we did not continue without such. But this is a very competitive market. We have commented a lot about where the rates are which is not where we would like for them to be. And so, you are going to see obviously a variety of different discounting and incentive techniques designed to compel revenue generation and all of the major brands clearly are in that game and we would expect it to be that way until the market starts to trend up and hopefully we'll be able to report that in the forthcoming quarters. But right now it's a very competitive business.

Oasis overall as I mentioned before is commanding really quite remarkable prices in the environment that we are in and it has, I think 37 different categories of state rooms although which we're managing individually by selling. So I would never say that there couldn't be a discount associated with Oasis but if you look at her performance on the whole, it's really quite spectacular at this point.

Felicia Hendrix - Barclays Capital

Great. And then, Brian just on the cost side, can you just help clarify something, the guidance that you gave for costs back when you reported in the fourth quarter, did they include the same FX benefit as to what you laid out in your release this morning?

Brian Rice

Yes. Roughly speaking, they would. What we've tried to do, we are going to continue to give you our guidance in constant dollars. I am sorry in real dollars. And we've always had that practice. But with the growth of our international business and the type of volatility that we have seen, really that began back in September.

I think the graph that showed the Sterling having 25% tight movements within versus the second quarter last year, we just felt it was very important to not only point out how FX was impacting our revenues but that we do have a natural offset that when our yields do suffer from the -- the strengthening dollar, but we do have a natural offset on the cost side and that tends to help us maintain our operating cash flows.

Felicia Hendrix - Barclays Capital

Okay. What I trying to get to is also used to be prior and that cruise cost ex-fuel you are looking for down five to seven and now you are looking for down six to eight. I'm just wondering if it's fair to interpret that improvement being generated by other things that you were doing internally to cut cost or is it being driven by FX?

Brian Rice

That would be predominantly because the dollar has been a little more stable since the end of January. So, what you are seeing that movement, we are comparing apples-to-apples, the five to seven, the six to eight. Most of that is being driven by the success of some of our cost management measures that we have been doing.

Felicia Hendrix - Barclays Capital

Can you just briefly talk about what has been the most successful and what has driven you to this new guidance?

Brian Rice

I think it's been an incredible effort by all our brands' management team. They have been very focused and trying to take advantage of the current environment. Just as we are seeing a lot of pricing pressures with our product, I think a lot of our vendors are seeing pricing pressure and I think our teams have done a great job of negotiating. And I think; I know Richard and I believe Adam both commented on the fact that best part of this is we are actually seeing some of the highest ratings we've ever seen from our guests.

So it's all been done in a very methodical way but a lot of teamwork involved in getting it done.

Felicia Hendrix - Barclays Capital

Okay, great. Thanks a lot guys.

Brian Rice



Your next question comes from the line of Scott Barry with Credit Suisse.

Scott Barry - Credit Suisse

Hi Brian. You indicated in the press release, you expect that billion dollars plus of operating cash flow this year. Within what seems to be an implied working capital benefit, are you assuming that customer deposits now will be neutral to positive for the full year? Thanks.

Brian Rice

Sure Scott. Our customer deposits -- actually we hopefully are going to be filing our Q later today and you'll actually be able to see that customer deposits are down year-over-year and that's part of -- I mean it's not a large but that's all embedded within our yield guidance. And actually if you take our yield guidance, our customer deposits are actually doing better than you would infer from our revenue guidance that we have out there.

So, in answer to your question, we are expecting customers deposits come down slightly but most of that's being driven by the value of the FX that's out there as well as the lower yield offset in part by the higher capacity.

Scott Barry - Credit Suisse

Okay. Okay, great. Thanks Brian.

Brian Rice



Your next question comes from the line Robin Farley with UBS.

Robin Farley - UBS

Thanks. Most of my questions have been answered. I just wanted to ask about when you look at 2010 at the next Oasis class ship, do you expect that the financing this year is going to be kind of a template for the second ship? In other words, do you expect the 95% guarantee level and also the direct involvement from the Finnish government in terms of the financing itself or do you expect that to be replicated next year?

Brian Rice

Robin, I think its way too early to speculate exactly what we'll be doing. We are still more than a year and a half away from the delivery of that vessel. I think we've demonstrated by the way the Oasis came together, that we have a very good ability to go out and raise financing for these vessels. We have some excellent supporters out there and as we said with Oasis, we are not concerned about our ability to doing work.

I don't want to get it anymore specific than that. I would like to mention though because I've seen some comments about the fact that people were surprised by the SEC participation. This was not unprecedented. We actually, when we did the financing to the Independents of the Seas, a little larger than 50% of the financing from Independents of the Seas was actually an investment on the part of the region's export credit finance group. They actually took a quite large tranch of the independence of the seas as an investment.

And I believe that if you look into it, Finland in total has authorized somewhere in the neighborhood of about $3 billion of direct investment in exports in terms of providing liquidity and support of their export.

So this is not as unprecedented as may be some may have been hard to believe.

Robin Farley - UBS

And I think part of that comes from the discussions with management where that was kind of what was conveyed. But, okay great Thank you

Brian Rice



Your next question comes from the line of Steven Kent with Goldman Sachs.

Steven Kent - Goldman Sachs

Hi good morning, can you guys hear me?

Brian Rice


Steven Kent - Goldman Sachs

Okay, Well just I thought that maybe it was Adam who mentioned that for the third quarter, three quarters of the bookings or the expected bookings would come from European customers. Am I right and is that what Adam said?

Adam Goldstein

Yes, you are correct Steve.

Steven Kent - Goldman Sachs

Okay. So my question then is dealing with the IATA and cost of brand through carnival (ph), they have always that the customer is very much a last minute booker. So I guess what I'm asking is so we're still pretty far away from that peak third quarter season, what's giving you the confidence in fact that that customer is going to show up since they are -- they tend to be last minute bookers?

Second, when you look at your Q3, Q2 essentially guidance, it still implies a massive rebound in the fourth quarter and I guess I am just trying to figure out what's in the fourth quarter other than may be slightly easier comparisons that's giving you that positive tilt?

And then final question in churn, are you seeing people make deposits then block the deposits and then come back in at lower prices?

Adam Goldstein

Steve your first question about what is -- how we are visible is Europe for us at this point and what are our expectations about what we will happen as the season unfolds. We've been ramping up by about one ship per year and the Royal Caribbean International brand. We feel like we have a pretty solid platform for doing our revenue management analysis. We have been present in all these countries where we are marketing today. We have long term relationships with travel agents and consumers in these markets. So, we understand that there are differences. For example countries on the Mediterranean rim] we have home port products in Barcelona or Venice for example.

We understand that these are later booking markets and we are comparing year-over-year trends and we are getting our feedback from the market in terms of what will happen. The country directors in those markets are -- their optimism is consistent with the overall guidance that we've given its staked into that.

In the UK, which is a very significant market for us, the customers continue to book further out in many other countries. And so when we look at our products like Independence of the Seas which is based on South Hampton and it's an important part of our European mix. We feel like we have a pretty solid platform for projecting forward performance for the rest of the season.

On the other hand when we have introduced a new product for the whole summer with Vision of the Seas during shore cruises from different (inaudible) ports, there is a little bit more variability attached to that outlook. So it's all sort of baked in together and overall we feel comfortable as I mentioned in my comments that Europe is having a neutral to slightly favorable influence on our guidance as compared to three months ago.

Brian Rice

Steve, I will comment on your second and third question. In terms of Q4, we actually tried to spend a little bit more time on this call, really showing how we believe the evolution of the year would come about and we are looking for a better fourth quarter results than we do see in Q2 and Q3 in terms of yield performance.

There are really four drivers. The first you mentioned the comparable. I believe last year our yields in the fourth quarter were down right in the range of around 5.9% and if you recall when we did our third quarter earnings call we were actually projecting a yield improvement in the fourth quarter. So we did see a substantial deterioration in terms of the impact from the economy and we think we have paid a large price at that point of time.

We also have a significant difference from Q2 and Q3 in terms of FX. In Q2 and Q3, we're talking about 5% points of yield deterioration fully attributable to the value of the dollar or I should say the value of our foreign sales coming in. And we don't have that in Q4 right now based on the current spot rates.

The third thing that will really help the fourth quarter is the Caribbean. As you rightfully pointed out there is a lot more pressure on Alaska and the more high-end products. When we get back into the Caribbean in the fourth quarter, we do drive the benefits from that.

And then the fourth factor while its only one month, I think the Oasis really has been an absolutely terrific product for us. There is a lot of excitement about it. If you go on the internet and compare the pricing that she's getting, it's absolutely terrific.

And frankly, I think the brand is probably experiencing some degree of a halo from that vessel and is benefiting from that as well.

On your last question related to churn, we absolutely have seen churn. It was included in the first quarter. Frankly in our forecasting, we were expecting to actually see a little bit more churn than we have got and that was one of the benefits that we had ending up at 13.5% versus our prior guidance.

We've have tried to bake that into our guidance. We look at this very carefully, I think our revenue management team as Richard alluded to, really does a really thorough job in evaluating and thus far has proven proving to have a lot of creditability. And I think we have baked that all into our assumption.

Steven Kent - Goldman Sachs

Okay. Thank you.

Adam Goldstein

Okay. I guess we're running out of time, but we'll take one more question if we could operator.


Your next question comes from the line of Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair

Hi, good morning. I'm just curious with airfares having really retracted particularly to Europe, are you starting to see any kind of correlation and the benefit to your yield and bookings now for Europe? I know it's a little bit of a speculative question, but those airfares are dropping dramatically.

Dan Hanrahan

Sharon it's a good question. We work very, very well with our travel agent partners and rely on them heavily for our business. And we've been communicating just that same fact with them. We, as I know, charts that Brian showed you, you started to see Q2 and Q3 tick up in terms of demand. And we do think that the fact that airfares have come down probably is impacting that some what.

Sharon Zackfia - William Blair

Do you think that's been communicated well to your potential passenger base?

Dan Hanrahan

Well we are doing a good job giving the word out to our travel agents. We're letting them know and we're asking them to get the word out. I think travel agents are trying to get that word out of their selling cruises.

I know when they call into us, the travel agents they are telling us that that's what they are doing. They are trying to get that word out there that airfares are down.

Sharon Zackfia - William Blair

Okay, great. And then lastly, I guess this is always a question during times like this, are you seeing your passenger mix skew more towards weekly (ph) passengers at this point? Are you getting more first timers, people who haven't cruised before but are kind of drawn in by the low price is a good point?

Dan Hanrahan

Sharon, it's Dan again. We're seeing a fairly similar mix depending upon the brand. We haven't seen anything that's been a big, big change in terms of our mix of our guests. It'll be interesting as we go forward to see if that changes. But at this point, we're seeing fairly consistent mix.

Sharon Zackfia - William Blair

Okay, great. Thanks.

Dan Hanrahan

You bet.

Brian Rice

Okay, I'd like to thank everyone for joining us today and IM will be available throughout the day if anyone has any follow-up question.

Have a great day.


This concludes today's conference call. You may now disconnect.

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